China faces unique land policy reform challenges. Unlike economies where landowners have full property rights, rural land is owned by collectives (the rural political unit), and urban land is owned by the state. Rural households can only transfer “contractual use rights” within their collectives, while urbanization of land can only happen via state requisition. This incentivizes local governments to expropriate rural land at modest, fixed prices and develop it at a profit, which is a major element of financing for fiscal expenditures to meet GDP targets. Rural households are limited to subscale farming and are under-compensated for their land when relocating. More efficient land allocation is needed to balance urban-rural interests and encourage mobility. Recognizing this, the 2013 Third Plenum reform program pledged to promote agriculture at a commercially viable scale by permitting consolidation of small plots into larger farms, to make rural nonagricultural land marketable like urban land, and to end the hukou system (legal permanent urban residency) that bars mobility. The question is whether and how these plans are being realized.

Our primary indicator for land reform tracks the area of rural land that can be offered at market for the best purchase price – which we consider “reformed,” the slim red area in the chart. All other rural land remains constrained in terms of marketability. The Ministry of Agriculture releases agricultural land turnover data once or twice a year. For rural nonagricultural land, the Ministry of Land and Resources publishes a yearbook annually and holds occasional press conferences on pilot programs. These fragmented data sources are far from adequate. Supplemental indicators look at land requisition financials, land requisition area, newly urbanized land by use, urban land prices, and rural credit. Most of these indicators are updated only annually with a one-year lag. That said, they provide a basic statistical picture of the magnitude of unfinished land reform. We complement the data with policy analysis to gauge progress.

Quarterly Assessment and Outlook

Encouraging the market-based transfer of rural land, unifying urban and rural nonagricultural land markets, and equitably allocating resources between urban and rural areas were explicit goals of the Third Plenum Decisions in 2013. These are critical issues if Beijing intends to rectify socioeconomic disparities by promoting urbanization and more fairly distributing the gains of the country’s rapid economic growth, as it has promised to do. Our primary indicator focuses specifically on policy progress in reducing the state’s role in the transfer of rural land that is designated for nonagricultural use – which has traditionally involved forced expropriations at unfair compensations rates for rural residents. The government’s stated Third Plenum 2013 goal was to allow market forces and participants to dictate the process. But our indicators show that little progress is being made. The amount of rural nonagricultural land made available to the market remains almost undetectable, despite the country’s massive supply of rural land. Beijing also made little progress in using land reform to boost rural incomes in the review period.

Beijing unveiled some new thinking on land-related issues at the 19th Party Congress in October 2017 with the announcement of a “rural revitalization” agenda meant to invigorate development in China’s countryside by encouraging innovative policy designs and entrepreneurship. Embedded in the agenda is an important new approach to land reform – one that seeks to overcome internal debates about land ownership that have long stymied reform progress by maintaining the “collective ownership” construct for rural land while allowing farmers to transfer their “right to use” land and enjoy investment income by retaining their “right to manage” it. Such an ambitious policy design is a step in the right direction, but it will be hard to implement given the vested interests that inherently oppose land liberalization, a political environment that stifles local policy innovation, and the complexity of this approach.

Slow movement on land reform stifles rural incomes while ensuring that the state receives a greater share of the proceeds when land is transferred for development.

This Quarter’s Numbers

Our primary land reform indicator tracks the area of rural nonagricultural land transferred at market prices as a means of gauging Beijing’s specific 2013 Third Plenum commitment to “allow rural collectively owned profit-oriented construction land to be sold, leased and appraised” in the market. This quarter we updated the indicator to capture a new 4Q2017 initiative that allows rural collectives in China’s 13 biggest cities to build urban residential rental housing on land previously designated for rural construction use. We add this land to our tally of rural nonagricultural land that has been “reformed,” meaning made eligible for sale or use as collateral by rural residents via market means. We also count land reformed under another set of 33 county-level pilot land reform programs underway since early 2015.

Our indicator reveals just how far land reform still has to go in China. The total amount of reformed rural land was a miniscule 110,000 mu (18,121 acres) at the end of 2017, as compared with 227 million mu (37.4 million acres) of rural nonagricultural land that could be allocated by the market. The new 13-city land reform initiative may drive improvement in our indicator in future quarters but did not come early enough to move the needle in this review period. The program was first rolled out in Beijing in November; by year-end 3,058 mu (504 acres) of rural nonagricultural land was converted for use in urban rentals, increasing the city’s available land supply for the year by 22%. By the end of January 2018, all 13 cities participating in the program had pilot plans approved by the Ministry of Land and Resources and the Ministry of Housing and Urban Rural Development.

Slow movement on land reform stifles rural incomes while ensuring that the state receives a greater share of the proceeds when land is transferred for development. Land sales were strong in 4Q2017, increasing 35% year-on-year (yoy) (see Land Requisition Financials), and both land supply and prices increased – an unusual phenomenon that plainly reveals what limited role markets play in China’s land system. This happened for two reasons: (1) most of the increased land supply was transferred at subsidized rates for use in government-supported infrastructure projects (see Urban Land Supply by Use) and (2) the government released excess land supply in big cities in an attempt to cool housing price growth, while also forcing migrants out of Tier 1 cities and into Tier 2 & 3 cities. This drove up demand and prices in those Tier 2 & 3 cities. In Tier 1 cities, the average price of residential land grew by 13% yoy despite increased supply, quite high even though this marked the slowest growth since 1Q2016 (see Urban Land Prices). In Tier 2 & 3 cities, average land prices grew by 10% in 4Q2017, the fastest rate of growth since 4Q2014. Taken together, the data imply that local governments experienced substantial revenue growth related to land sales and high prices.

Rural households did benefit slightly from higher land prices, as growth in rural residents’ property income (made by leasing out land or from other real estate investments) accelerated to 11.4% in 4Q2017 from 9.3% in 3Q2017. But overall rural disposable income growth decelerated to 8.6% from 9.1% in 3Q2017 because of weak wages (see Rural Credit). Property income accounts for only 2.3% of total rural disposable income, as compared with 9.9% for urban households. This gap reflects the extent to which the government’s promise to use land reform to allow farmers to “participate in the modernization process on an equal basis” – an explicit 2013 Third Plenum commitment – remains unfulfilled.

Policy Analysis

The government announced a change of direction in rural development policy in 4Q2017 that also delivered new thinking on rural land reform. At the 19th Party Congress in October, President Xi Jinping announced a new rural revitalization strategy for developing China’s countryside. The plan urges the increased use of market forces to allocate rural resources, including land, with the help of financial institutions. It also pushes new mechanisms for rural residents to directly monetize land and calls for local policy innovations and entrepreneurship to support rural development.

The rural revitalization strategy lists three new dimensions for land reform. First, it divides rural land rights into three elements: ownership, right to use, and right to manage. This framework maintains collective ownership of land, while members of the collective (i.e., farmers) can contract out the right to use land and enjoy income based on their right to manage land. This approach was first proposed in 2014, but the rural revitalization strategy elevates it as a main focus of land reform efforts. The change enables farmers to mortgage out their land or trade it in for shares in a corporation instead of needing to abandon their usage rights entirely when transferring land. That would improve reliance on market forces in allocating land use – improving compensation for farmers, facilitating land consolidation, and making the agricultural sector more efficient.

Second, the strategy encourages a stronger reliance on financial institutions and financing practices in determining the value of rural land. This is also intended to be a “market-oriented” approach. The framework is to deepen property rights reform by converting “resources to assets, capital to equity, and farmers to shareholders.” With a nationwide land registration program set for completion this year and that information meant to be shared across government agencies, it will be possible to identify individual land use rights, enabling transactions including the use of land as collateral and share transfers.

Finally, the rural revitalization strategy gives local governments more flexibility to pursue innovative development strategies, as opposed to delineating specific goals such as improving agricultural productivity or rural tourism – which were goals of the “new socialist village” strategy of the previous Hu Jintao Administration. The plan encourages businesses, governments, and residents to explore new business models within and beyond the agricultural sector via new entities (management agreements, share cooperatives), new products, new services (elderly care, tourism, logistic, storage), and new markets (such as on the Internet). But it lacks substantive details about how to accomplish these goals.

Taken together, rural revitalization looks like a step in the right direction but one that is unlikely to dramatically improve our land reform assessments without more fundamental changes in the government’s approach. For example, even though rural revitalization promises a greater use of markets in land allocation, Beijing maintains stringent food security goals and resulting restrictions on land use. The city of Beijing, for example, is required to hold 110,700 hectares (273,500 acres) of land in reserve for agricultural use through 2020, equivalent to about 80% of the size of its existing urban districts. This land would not be transferable for nonagricultural purposes even under this strategy. And despite calls for local policy innovation and entrepreneurship in rural development strategies, the current political direction of centralization and tightening control pushes in the other direction.

Explore the Reforms

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